Job not finished for UK economy, OECD says

The United Kingdom’s economy is projected to expand this year and next, but challenges remain to boost productivity and make future growth more inclusive, according to the OECD’s latest Economic Survey. The Survey, presented in London by OECD Secretary-General Angel Gurría and UK Chancellor George Osborne, says that annual growth in the UK rose 2.6% in 2014, the fastest among G7 countries, and is projected to be at the same rate this year. The recovery has been underpinned by highly accommodative monetary policy and measures to support lending and revive the housing market. With a vibrant and inclusive labour market, the unemployment rate has fallen rapidly to 5.7% and employment is at record levels. However, labour productivity has been sluggish since 2007, which is holding back real wages and improvements in living standards. House prices have increased rapidly as housing supply has not risen to meet demand.

“The United Kingdom has made tremendous progress exiting from the worst economic crisis of our lifetime. Job creation is remarkable and growth is strong, but the UK has to finish the job,” Secretary-General Gurría said. “Boosting productivity is essential to making this recovery durable and to ensuring that the benefits are shared by all. This requires further efforts to improve infrastructure, enhance access to finance for sound businesses and promote skills.”

The Economic Survey addresses several ways in which productivity could be enhanced. The UK is one of the most flexible economies in the OECD, and structural reforms have strengthened work incentives and supported an already positive business friendly environment. However, improvements in education and skills are necessary as well as measures to reduce income inequality. Developing further the knowledge-based economy (including innovation and skills), and strengthening infrastructure and improving the financing of the economy are also critical in this regard.

Indeed, greater infrastructure investment is also at the core of raising productivity. To improve investment prospects, the OECD suggests that the UK further develops its long-term infrastructure strategy and planning by making the National Infrastructure Plan more prominent. With limited public resources, infrastructure financing could come more in the form of public-private partnerships and public guarantees for privately financed infrastructure projects. The Green Investment Bank and other targeted financial aids should be strengthened to meet environmental goals. Improving land use planning and regulation is also key to enhancing housing investment and increasing affordability for first-time buyers.

Major and welcome reforms have been implemented to strengthen banks and tighten financial supervision and regulation. But banks in the UK could still pose a risk and businesses still find it difficult to secure financing. The OECD suggests further reforms to enhance banking sector stability, which should support lending in the medium term. Better sharing of credit information and the development of new credit providers, which should be properly supervised, would increase credit availability.

The OECD also recommends that the burden of consolidation measures should be fairly shared among citizens. The exact composition of medium-term fiscal adjustment will need to be set out clearly and the Economic Survey formulates recommendations both on the revenue and spending side.